Guru Speak: Seth Klarman's MIT Speech in 2007

Seth Klarman MIT Speech2007

Want to be a better investor? Chuck your online portfolio

There are many things which you can do to evolve as better investors. Multidisciplinary learning, reading annual reports, deep knowledge in some business areas, asset allocation, position sizing, concentration vs diversification, portfolio management etc. In this post, I want to share one area which subtly pushes you to becoming a better investor.

These days nearly everyone maintains an online portfolio. These portfolios provide real-time (or delayed by a few minutes) portfolio value. It maintains your buy price, number of stocks, current market price and total current market price of holding.

Now let me come to why you should NOT maintain an online portfolio. It is important to know and understand what action we are taking based on the information I possess. Having an online portfolio does not help in taking any action. For example, if the market value of your portfolio rises 0.5% on a day, do you start thinking that "Wow, I am 0.5% richer, let me sell all my holdings!!". You don't. You mostly stare blankly at the computer/mobile/tablet screen and feel happy (if the portfolio is up), sad (if it is down), very happy (if it is up more than the index) or very sad (if it is down more than the index). So, if you don't really do anything productive with your online portfolio, isn't it time to question why you need it in the first place?

Here are some distinct benefits of NOT having an online portfolio:

• You don't waste time on tracking prices on a daily (or hourly) basis
• You actually do something productive with your time (like reading annual reports, sector reports or getting your day-job completed)
• Your time horizon for investing increases as you are not on a minute-by-minute tracking mode
• You maintain an offline (paper or simple spreadsheet) and update the prices once-a-quarter (or more infrequently if you like). Simple fact of having to look up individual prices will deter you from updating frequently!!
• You will limit the number of stocks in your portfolio from 100s to a much lower number if you have to track prices manually!!

This is one easy way to inculcate a good investing practice. (Apart from stopping to listen to the chatteratti on CNBC). Try it and see if it works for you.

Seth Klarman - Psychology of Leadership

Energy Infrastructure - Need to look into the future

With shale oil and natural gas recoveries in various parts of the world, the future of the oil economy is already starting to change. According to the 2010 World Energy Outlook by the International Energy Agency, the world shale oil resources may be equivalent of more than 5 trillion barrels of oil of which more than 1 trillion barrels may be technically recoverable. In comparison, the world's proven conventional oil reserves are estimated to be at 1.3 trillion barrels. This means that the quantity of economically recoverable shale oil is almost equal to the amount of oil. But, the major difference is that majority of the world's shale oil deposits are in USA. In fact, the top 6 shale oil deposits discovered till date are all in the US. 


On the other hand shale gas, a natural gas which is extracted from shale rock formations, prices has crashed in the US due to excessive supply. In July, the supply is going to exceed the demand and storage capacity put together. This may mean a further crash in prices. That is why the import terminals in the US have applied for converting to export oriented ones. US has the 2nd largest shale gas reserves, after China which has the highest. Gas price in US is currently in about $2.5 per million British thermal units (mBtu). The latest figures from the U.S. Energy Information Agency (EIA) indicate that natural gas supply could exceed demand by 2016, enabling North America to become a net exporter of LNG. In India, domestic gas is sold between a price range of $4.2 and $5.65 per mBtu. Imported gas is sold for $13-14 per mBtu. The landed cost for US imported gas is likely to be much cheaper than the current rates.


Politically, US may start losing its interest in Middle Eastern politics and become a dominant energy exporter themselves. Also, this will mean that the concept of "peak oil" that was first propagated in the 1970s will lose its relevance.


From an Indian perspective, it makes sense to start building infrastructure for LNG on a larger scale. Building cars, filling stations, LNG terminals and storage tanks to power plants which run on LNG are needed. All this would take time and we should take up this challenege. Dr. manmohan Singh has expressed his desire to focus on the infrastucture sector. I would hope that this takes a high priority on his agenda, for the sake of India's future.

Balkrishna Industries - 4 prominent fund houses pick up stake

Four prominent fund houses today picked up stake in Balkrishna Industries.  Reliance Capital, SBI Mutual Fund, Prudential ICICI and Franklin Templeton bought over 47.73 lakh shares of Balkrishna Industries at a price of R240 per share. The investment by the four AMC's amounts to R114.55 Cr which is about 4.94% of the outstanding shares. ChrysCapital sold off its stake in the company by selling its 9.33% stake at Rs 240 through its subsidiary Copa Cabana. 

With the rupee losing value, BKT should continue to do well in its exports. The key risk is of course any reduction of orders from Europe which is a key market for BKT.

Using derivatives to manage portfolio volatility

This post in response to a query by Kiran on one of my previous posts. I sometimes use put options in my portfolio. Since, this is more a call on absolute levels of the market and its likely future direction, I use it sparingly.


Even when I do buy a put option, I buy a far out-of-the-money one so that I pay a low premium. Since, my portfolio is long-only, I don't need to buy call options for hedging. Also, I don't employ complicated option strategies like straddles, strangles or other such esoteric ones. My thoughts are simple, I buy puts with little premium so that if the market suddenly collapses, then I will make up for some of the loss in the stock values. And I am ready to write-off that premium if the market does not fall off the cliff.


And for this reason I use options only when we are close to a important event which has a large risk or a long term market top. So, for example, I might but a put option close to the 2014 elections or when Nifty goes to 6000.


Personally, I do not think small investors should try their hand at options. The certainty of losing money is much much higher than the possibility of making it over a period of time. It is much better to buy, hold (and pray!!) than to speculate on the future direction of the market.

Dr. Michael Burry speaks at UCLA

Dr. Michael Burry - Famous as the person who shorted his way to billions during the collapse of 2008.